July 10, 2014

I Think Paul Krugman Is Wrong on "Class and Monetary Policy"

I think Paul Krugman is wrong here. It is true that the rich do have more nominal assets than liabilities (not all of those Treasury bonds are held by the PBoC, after all). But it is also true that America's rich have a lot of real assets whose value depends on a strong and growing economy.

I find it implausible to claim that the net gain is positive when we net out the (slight) real gain to the rich from lower inflation with the (large) real loss to rich from lower capital utilization.

It's not a material interest in low inflation that we are dealing with here...

...even the top group [of those with more than $500,000] has more liabilities than assets.... But the S[urvey of ]I[ncome and ]P[rogram ]P[articipation] top [starting at $500,000] isn’t very high; in 2007 you needed a net worth of more than $8 million just to be in the top 1 percent [of wealth]. And since the ratio of interest-bearing assets to debt is clearly rising with wealth, we can be sure that the truly wealthy are indeed in the category where they have more to lose than to gain by a rise in the price level.... It’s also clearly true that the elderly rich are especially likely to own lots of bonds and not have much debt....

Struggling middle-class retirees living on the interest on their CDs?... There aren’t many of them and they’re less middle-class than you think.vBasically, inflation redistributes wealth down the scale of both wealth and age, while deflation does the reverse. And therein lies the deep explanation for inflation hysteria. The Fed’s efforts to boost the economy haven’t had the disastrous effects the usual suspects predicted, but it’s nonetheless true that this is no policy for rich old men (ROMs?). And playing to the paranoia of the ROMs is basically what the WSJ editorial page, Fox News, etc. is all about.

Comments

I Think Paul Krugman Is Wrong on "Class and Monetary Policy"

I think Paul Krugman is wrong here. It is true that the rich do have more nominal assets than liabilities (not all of those Treasury bonds are held by the PBoC, after all). But it is also true that America's rich have a lot of real assets whose value depends on a strong and growing economy.

I find it implausible to claim that the net gain is positive when we net out the (slight) real gain to the rich from lower inflation with the (large) real loss to rich from lower capital utilization.

It's not a material interest in low inflation that we are dealing with here...

...even the top group [of those with more than $500,000] has more liabilities than assets.... But the S[urvey of ]I[ncome and ]P[rogram ]P[articipation] top [starting at $500,000] isn’t very high; in 2007 you needed a net worth of more than $8 million just to be in the top 1 percent [of wealth]. And since the ratio of interest-bearing assets to debt is clearly rising with wealth, we can be sure that the truly wealthy are indeed in the category where they have more to lose than to gain by a rise in the price level.... It’s also clearly true that the elderly rich are especially likely to own lots of bonds and not have much debt....

Struggling middle-class retirees living on the interest on their CDs?... There aren’t many of them and they’re less middle-class than you think.vBasically, inflation redistributes wealth down the scale of both wealth and age, while deflation does the reverse. And therein lies the deep explanation for inflation hysteria. The Fed’s efforts to boost the economy haven’t had the disastrous effects the usual suspects predicted, but it’s nonetheless true that this is no policy for rich old men (ROMs?). And playing to the paranoia of the ROMs is basically what the WSJ editorial page, Fox News, etc. is all about.